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Buying property ready to rent out is one thing, renovating is another thing, and developing property is a whole other level.

 

Your SMSF can be a great platform to allow you to do all three of these, however it”™s VERY important to be across all of the rules to ensure that your SMSF stays compliant and you as the trustee of your fund don”™t run into any trouble.

 

Just as with renovating a property the main issue doesn”™t come from the development itself, but how you”™re going to pay for it. If you want to pay for it all out of cash (from within your SMSF balance) and don”™t need to borrow any money, you can go right ahead. In fact, don”™t worry about reading the rest of this post!

 

However for most people, there”™s going to be borrowed funds involved, which means playing by the Limited Recourse Borrowing Arrangement (LRBA) rules.

 

There”™s two basic concepts that need to be adhered to, when you”™re borrowing funds:

 

  1. Is the asset going to retain it”™s identity, or will it become a different asset?
  2. Is this is a single asset, or is it multiple assets?

 

Are you changing the asset?

Let”™s work through a few of the common scenarios of what”™s not ok.

 

A vacant block of land that you want to subdivide – this is clearly becoming different assets, not ok to purchase with an LRBA, but you could purchase with cash.

Demolish existing house and replace with strata units – nope, definitely creating different assets here.

Changing the zoning of the property, like from commercial to residential or vice versa – even if you don”™t significantly alter the structure, this is still altering the purpose.

 

With these items, it”™s not just a limitation of executing them with an LRBA. If you bought the underlying property with an LRBA, that arrangement will then be voided. In fact, that”™s where people tend to get themselves into trouble.

 

When are you making changes but not changing the identify of the underlying asset?

Adding an extension with extra bedrooms, landscaping, garage, granny flat etc – these can”™t be funded with an LRBA, but if you”™ve got the cash, they won”™t upset the existing LRBA on the property.

 

If you haven”™t got the cash available right now, do not despair! Just like you would save for a property deposit outside of super, you can do the same within the SMSF. If you”™re close to reaching the desired amount of cash, then carry on with either your salary contributions or additional concessional or non-concessional contributions. If you”™re a few years off, consider using an investment strategy (or even a geared investment strategy) to get your fund up to the level it needs to be for you to do this.

 

SMSFs are awesome, but they”™re not magic. You need to play by the rules, and be patient, if you have property development as a goal!

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Article by Rebecca Boles

Disclaimer: all information contained within this article is of a general nature and should not be relied upon when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.